PFRC report warns increasing marketisation could be fuelling poverty premium

9 Dec 2016

A new report warns that a growing ‘marketisation’ of the essential services economy is increasing the responsibility on households not to incur a poverty premium, rather than on suppliers not to charge it.

The report from the Personal Finance Research Centre (PFRC) has estimated the average cost of the UK poverty premium at £490 per household per year.

The PFRC, an independent research centre based at Bristol University, found that the most significant contribution to the average UK poverty premium came from low-income households who had not switched to a better value household fuel tariff, which incurred a cost of £233 per year.

Other costs that contributed to the premium included insurance premiums related to where people live (£84 per year); using higher cost credit (£55 per year); and the use of pre-payment meters instead of direct-debit energy billing (£38 per year).

The study also found that not switching to the best value fuel tariff was one of the most common premium types, with 73 per cent of low-income households incurring this penalty. The report states that increasing marketisation and an emphasis on switching as a solution to market failures is shifting responsibility for this sort of premium onto consumers, and away from suppliers and regulators. Furthermore, the PFRC suggests that low-income households are likely to be the least equipped to avoiding this sort of premium. They write:

“The supply and provision of goods and services does not adequately account for how people on low incomes often prefer to manage their money, or their sensitivity to the risks associated with upsetting close budgeting control and as such indicates a market failure.”

The PFRC’s estimate of the average UK poverty premium is lower than previous estimates of £1300 (Save the Children, 2010). This is because the PFRC estimate takes into account the proportion of households that incur the different component costs of the poverty premium. Costs that are large and affect large numbers of low-income households, such as high fuel tariffs, are more heavily weighted in the average.

In addition, the report grouped households into clusters according to their exposure to the poverty premium, in order to reflect variation in experience. The average cost of the premium for ‘premium minimisers’ was £350, whereas for the ‘highly exposed’ it was as high as £750. The report states:

“Averages can mask significant variation in the lived experience of the poverty premium. One ‘highly exposed’ family, for example, is estimated to incur a premium of £1,680 per year, considerably more than the average premium of £750 for their cluster.”

Read the full report from the PFRC, available here.